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What are sale leasebacks and how can someone navigate absolute NNN Leases? In this episode, Neil Wahlgren and I talk about industrial as an investment asset class and how it differs from multifamily. We also discuss how to look at single tenant risk compared to demographic market risk.

Neil brings nearly two decades of leadership in operations and capital markets. Prior to MAG Capital Partners, he led a Bay Area real estate investment firm, raising capital for over $200M in projects. Before that, he logged over 2,500 flight hours piloting the C-130 in the Air Force and Navy. Following combat tours to Iraq and Afghanistan, Neil concluded his military career as a Lieutenant Commander.

If you are looking to learn more about Industrial Focus Transitions and how to differentiate between industrial and multifamily investing, Neil has all the information you need to understand it. You’re going to want to tune in and hear what he says on today’s episode.

If you liked what Neil had to share today, go ahead and give him a follow as well on LinkedIn:
www.linkedin.com/in/neilwahlgren
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Neil Wahlgren: Single Tenant Risk Vs. Demographic Market Risk

You're going to want to tune into our next episode where we use Neil Wahlgren as our guinea pig. Why a guinea pig? It’s because not all the time that you get to use somebody who used to be in the Air Force and fly C-130’s that's now in the real estate world as somebody you can throw questions at and get him to answer them. We're going to find out what 100 countries, Neil Wahlgren’s C-131, and Triple Net Investments have in common. You're going to want to tune into the show and see what that's all about.
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You are in for a treat. I've got a good friend of mine, Neil Wahlgren on the show. Neil, say hi.

How is it going?

Neil is a fellow pilot. Neil, were you out flying this morning?

Yeah. I got my mountain checked out, flying up to the top.
There's something magical about being out by yourself with your thoughts because you can get some heavy thinking going on.
I want to fly into the mountains as well. That's something we share in common. You started out in the Air Force. You went to over 100 countries. You're now in commercial real estate. Take us through that journey and help us understand what your background is that qualifies you. How ordinary people can do what you do? How you got to where you're at and what you're doing?

I've always thought that I find the backstory on how people stumbled into real estate, especially commercial real estate. It’s interesting because at least from my personal experience, very few people go directly into it out of high school. Most people pursue a tangential or a totally different path before they end up in that real estate journey. Mine was unrelated at first. I grew up in the San Francisco Bay Area, very much suburbia, consistent, safe, predictable. I was eighteen and wanted the polar opposite. I couldn't go to the Air Force Academy. I ended up getting a pilot slot, worked through a couple of years of flight school, and ended up flying the C-130 Hercules. I got to do that for almost ten years of the Air Force and for a few additional years of the Navy reserve. I got to take it all over the world over 100 countries to combat deployments in Iraq and Afghanistan. I lived in Tokyo for four years. It’s a great way to experience the world and transition from a boy to a man.

It's funny because I wanted to go into the Air Force also right out of high school. They looked at my grades and said, “Maybe real estate is for you. You do not pass. You do not see the world. You do not get your own airplane. Get out of here.” What did the military teach you about business?

Honestly, I would say two main pieces and this might even be more specific to the flying world, but you can apply to a lot of operational fields, which you see a lot of in the military. That's checklist discipline and operational risk assessment. Flying is a very complex machine that's been refined over the years ever since the Wright brothers put their first contraption in the air. Most aircraft are iterative improvements. There are not a lot of huge groundbreaking changes. It's just small incremental pieces that make them better, faster, lighter, stronger, etc. You can attest to this that checklist discipline of getting, “Here is a sequence of events that works.”

This is a culmination of tons and decades sometimes of people that have tried different routes and ultimately settled into, “This is truly the best way to start a plane, take off, do airdrop, do short field landings, and do all these pieces.” To adhere to this checklist that's proven and refined over time, I found that piece is hugely transferrable to the real estate world. With what we're doing everything from tackling a project from acquisitions to placing debt, especially my focus is more on the capital raising side. The consistency, the process, and the methodology of that, I find that has a huge amount of parallels with the flying world.

The other thing that I would see that I love about being in the air is that in the real estate world, it is three-dimensional. You can go up down or sideways and you can't do that with a car. You can pull backwards, you can go right and left, but you cannot go up or down. It's funny because the other thing that I love about flying is when I've had a terrible day at the office, I can get on the plane. I can shut everything off and it's just enough that it takes my mind right out of my problems and right back to where I can see everything clearly. It's funny how often I solve my problems on the plane.
RRE 267 Neil Wahlgren | Single Tenant Risk
Single Tenant Risk: Your upward mobility is more tied to your skills, energy, and competency than seniority and when you got hired.
Single Tenant Risk: Your upward mobility is more tied to your skills, energy, and competency than seniority and when you got hired.
I love taking friends up, but there's something magical about being out by yourself. Just with you, your thoughts, and your noise-canceling headset. You can get some heavy thinking going on.

That’s the best thing that's ever happened to me. I know that Orville and Wilbur would have gotten one if they did know. You did your stint in the Air Force and you went to the Navy. Thank you for your service. We appreciate it. We need more people that are willing to take on combat for our nation. Where did that leave you? You're out of the military. All the excitement is gone. What’s next for Neil?

I hit an inflection point in my flying career with the military where I saw, “I either stay in, continue, fly a little less, keep going to the same places and take more admin jobs. It would have been okay but to quote Marie Kondo, “It didn't spark joy.” If what you're doing is not sparking joy and making you genuinely happy, do something else and find something new. That is what I did. I went back to the drawing board and say, “We could go fly commercial. It was the same boat flying for it.”

Cincinnati to Cleveland twice a day.

It's depressing even thinking about it for me. I slide against my plenty of ex-military friends who are now in the commercial world, but it's certainly not a career field for everyone. For me, I needed something where your upward mobility is more tied to your skills, energy and competency as opposed to seniority when you got hired. I think that was one of the big shifts there. I did what anyone does when they're not happy with the world that they're in, you do the polar opposite again. I went from a bureaucratic big military to a small startup in Southern California. It was neat. It was a renewable energy company. I was employee number 40, I believe. The company had a technology effectively of taking waste, wood, feed, stocks like forest residues, woody type of materials and cooking it in a technology called pyrolysis. Similar to how you make activated carbon but a different set of parameters. They could extract hydrocarbon-rich vapors that went on to become the aromatic portion of gasoline.

The other side of the technology was this black granulated material called biochar. These guys knew it was effective for enhancing soil and improving growth. It is a number of soil benefits but there wasn't a market for this particular asset class in the soil world. I got to run the business development. We were bringing it to market, retail channels, horticulturists, UC Davis, and big research grants. It was pretty fun. Ultimately, the economics of the company didn't quite shake out. The company ended up going under a few years later. It planted the seeds for me of this kind of startup entrepreneurial. Your net worth can be associated with the amount of risk, time and effort you put into a new field.
If what you're doing is not sparking joy and making you genuinely happy, do something else and find something new.
That resonated with me. Ultimately, when that company started to wind down, I had an opportunity to move out to the Bay Area. I moved to San Francisco and ended up getting connected with the husband of a family friend of our family who had a company somewhat established raising equity for real estate deals. A mixture of the idea behind it is numbers-based quantitative. The underwriting wasn't too crazy and with the personal connection. There was an opportunity to come to join the team. That ultimately is somewhat by chance but the timing lined up for me to make that transition over to the real estate side. This was several years ago.

The process has played a part because you're taking a product, you're turning it into something, you're marketing, you're doing all aspects of that. Now, you're with a capital raising outfit that's doing real estate stuff or you're the capital raising part of that, is that what I understood?

That particular company was strictly capital raising. Their business model was to partner with operators or developers who had a skillset putting together a deal, lacked access to their own capital or their own investor pool. We would effectively be the equity arm as a JV partner through the life of that deal.

How long were you there? You walk in the front door knowing how to make biochar straight into the real estate grind. How long were you there?

I spent a little over four years there but I got my MBA. The quantitative side of things has always been somewhat easy for me. That helps in understanding both of here’s a new concept. Its inputs and outputs. You have your inputs which are rents. Your outputs are expenses, your debt service, and your distributions to your investors. Being able to shake that out and understand the value behind it, it’s not so different from a lot of other fields, just structured in a different way.

For those of you that didn't know, Neil had his MBA. He used the word quantitative. Now we know. Again, your checklist and your processes. We can see, out of the military, you've been able to create the same processes with whatever it is you're using that make that something that you can walk into something new, discern what's going on, make a checklist about it, run with somebody else's checklist, make it happen, and be able to successfully execute at any level. Where did you go with that company? You went from basic knowledge of real estate. I didn't hear any conversations about real estate knowledge prior. Are we missing where Neil learned a lot about real estate and became a fundraiser? Did Neil goes from not a lot of understanding about real estate to a fundraiser, learned on the job, and put it all together in four short years?
RRE 267 Neil Wahlgren | Single Tenant Risk
Single Tenant Risk: Don’t follow the herd. Instead, carve out your own model in your field.
Single Tenant Risk: Don’t follow the herd. Instead, carve out your own model in your field. 
I had some personal interest in my previous firm. It was just something that I always knew I wanted to get into at some point. It wasn't a burning passion at that time. When this opportunity came up, there was a catalytic moment to say, “I need to learn every single thing I can about this.” It was everything from Meetup groups to webinars, a ton of reading. I came in under an operations role where I was forming partnerships with other syndicators or other operators, and getting a look under the hood. To me, that was hugely helpful to start from an underwriting piece and go, “How do we break this down, how do we dissect this, and how do we unwrap this deal to see if the sum of its parts is better than what it looks like from the outside, or does it get uglier as I dive in deep?“ Not only that but to be able to do it with different asset classes.

We had partners that strictly did multifamily projects in Northeast Atlanta. We had someone else who did multi-tenant retail in the Dallas Fort Worth area. Another development group that did a senior assisted living in North Cal, and getting to see all these different angles. Work sponsors and investors splits and see how do you create value and how do you align incentives. You start seeing trends and it all comes together at some point. For me, that was about the two-year point. On that side, the founder was taken a backseat with some personal issues. I ended up taking a VP and eventually, the president role of the company and running it.

You did go from bottom to top in that organization. Coming in as operations, that's pushing buttons and pulling levers. That's no small feat and that's something to be proud of, but that wasn't enough, was it? That wasn't where the story ends, is it?

It’s not. To be clear, I don't know where the story ends yet, but I can tell you where the story is right now. In one of the groups that I worked with, we raised some partners as the equity arm in early 2016, 2017. It was MAG Capital. The model is interesting. The model single tenant net leased industrial. It’s a large manufacturing company. Before I jumped into the model, what I found over time was, as I worked with all these different groups, the correlation of successful projects to sponsor groups. Typically, it didn't have a lot in common with individual deals. It had a much higher correlation with the team, quality of the team, and communication of the team. It made me re-evaluate how I look at deals and before I even looked under the hood, I started looking at the team first.

The team I connected with at a high level is run by some guys about my age and entrepreneurial. I felt like they had taken some risks in that they wanted to not follow the herd but carve out their own model in a field that not many people who are bringing private investors are doing. To my knowledge, I’m probably one of no more than three people that are effectively syndicating single tenant net leased industrial through a sale-leaseback. That is our bread-and-butter model. It's fun being one of the few players in a big real estate world. It's been fun carving out our model and our brand within that.

Everybody in America is programmed to own. From the time we're little we own like, “Those are my toys.” You own your home and all of these things. Why would someone who's built a business sell the building? It's genius because you've got the person that loves it like their own but they don't no longer own it. Why would someone sell the building that the business is in?
You need to learn every single thing about your interest before diving in.
Before looking at all the moving pieces, it comes down to where is your money most effective. To break down what does a circumstance look like that makes a seller want to do a sale-leaseback. These are typically tenured companies. They're manufacturing, making car parts, frozen pies or white label cosmetics. The gamut is endless. These guys have been family-owned or locally owned and grown in a very organic way, super low debt just for that year over year, 3% to 5% increase in sales, and healthy EBITDA margins. What typically happened is they've been acquired by private equity. Those private equity groups are geared toward rapid hockey stick-shaped growth.

The way they do that is they look at all these different ways. They can have capital tied up and go, “Where is my capital best used? Am I making the best use of my capital owning real estate if I'm a private equity firm or do I get a better overall return by extracting the capital tied up in this building, sitting there appreciating, and redeploying that into the new portfolio company that I bought for a reason because I think I can take this thing to the moon?” That's the underlying reason. They are saying, “We can get a better internal ROI by putting this capital into this business and taking it out of the real estate.”

I remember talking with my carpet guy about wanting to build a building. He kept coming back and I put it to him plainly, I said, “Are you getting the best discount that the mill offers, maximizing your price and terms on your product?” He said, “No.” I said, “Why wouldn't you want to do that?” “Because I want to own real estate.” I said, “You're taking money out of your business. You're taking 20% down. You got a $2 million building. You got to take $400,000 out of your business that you could be getting a better price in terms through this to get more revenue coming in. Your deal is about revenue and not about buying these things.” There are tons of examples of that but that was one of the things that I put out there.

I also appreciate the fact that you realize that we have a large Canadian audience and you've used the hockey stick out there. Now, you're working with these guys that are at MAG Capital and you're able to revitalize the cashflow because everybody thought they had to own their business or they built a specialized building. Now they've bought that building. Isn't that an interesting correlation because the value of your building is based on the rent that you're paying. Now as an owner, they're in a conundrum. You're now sitting there setting the rent on your building that helps evaluate the price point of your building based on what you want to pay for it long-term. How do you guys deal with that as far as what your rents are, what assets are worth, what rents are worth, and what the buyout is?

This is a roundabout way to answer your question. Let's say I'm buying a multifamily deal. I'm the buyer and you're the seller. There's a lot of little things we can negotiate, but at the end of the day, it comes down to price. Either you're going to feel like you won or I'm going to feel like I won. It's hard to be truly a win-win in that scenario unless someone is a truly motivated seller. One thing I like about the sale-leaseback transaction is we have two levers now. We are negotiating price and we're negotiating rent, and there are a lot of different scenarios. One seller might say, “We're looking to maximize the proceeds from this sale. We’re looking to pay off debt and reinvest in new manufacturing lines,” whatever it looks like. They might say, “We want to sell on the high end of the market.” We might turn around and say, “In return, you're going to pay on the high end of the rent spectrum because we need that yield,” or we might have a buyer says, “We're looking for modest proceeds but we're looking for low rent obligation down the road.”

In that scenario, we can go to them and go, “We're going to sell on the low end of the spectrum and we'll lease it back at below market.” That's our preferred strategy there. What's nice is you're able to work with the seller in a fashion that aligns interests in a much more fluid way. The fact that that seller stays with you because now these are your tenants or she's your tenant. That motivates people to play nice in the process and not try to squeeze every last nickel out because when you're my tenant and you were a jerk when you were selling this deal, the next time you're asking for a favor, I'm going to recover that.
RRE 267 Neil Wahlgren | Single Tenant Risk
Single Tenant Risk: Your net worth depends on the amount of risk, time, and effort you put in your work.
Single Tenant Risk: Your net worth depends on the amount of risk, time, and effort you put in your work.
The other beauty of that is their triple net leases. When the light bulb goes out, they're not calling you. When the parking lot needs to be redone, they're not calling you restriping. When you've got a major snow event, they're not calling you. That's all still on them. Their facilities manager still stays busy. The only thing that changed is their cashflow got better because more than likely, their payment for their facility went down because they're not contributing interest. They're only paying an interest payment, not a principal payment on top of that. All of the real long-term obligations that go with that are not there. When you do this, what typically happens on your proforma? When you're buying these as MAG Capital, are you staying in them for twenty years? Are you guys looking at a 3-to-5-year horizon? What's your investment parameters on this and where are you trying to go with those?

We feel we are building some value. There's a lot of small incremental ways to build value. We feel one of the most direct ways is putting a brand-new long-term lease in place and being the first owner of that lease. Our usual term is 15 to 20 years. We don't plan to hold that long. We usually hold about 4 to 5 years for modest appreciation, consistent cashflow. We do have a heavy credit look into the financial strength of that tenant company to pay their obligations to include rent. The longer you hold that deal, the more uncertainties there are on where that credit picture goes. Within about five years, typically, you can know a fairly high degree of certainty those obligations will be met. We go and sell that same building, still fifteen years left a term on that lease. We're able to sell to the next buyer who still has a lot of cashflow that we had from that as well.

That's a great model. Where are you sourcing these deals? Do you run an ad on Craigslist, “We'll buy buildings for cash?" When you're talking about the size and scope of the buildings that you guys are taken down, how are you sourcing these?

It's a mix. There are some direct private equity-backed deal flows but most of it is still done through more traditional commercial broker relationships. The amount of national scope sale-leaseback experienced brokers, it’s a couple of dozen max, so it's a narrow subset specialized skill that most commercial real estate brokers don't have or haven't done enough sale-leaseback to be the go-to representative for this transaction because it is a more complex transaction. Most sourcing, we buy and sell from the same small group of people. Both of our principals are commercial real estate brokers. Most of the acquisition and selling flow goes through them.

I see that as being a very niche but a very necessary business. Who are your investors?

We have a mix. It's high net worth, family office, and some well-paid retail investors. We get the right group in place to have reliable capital and be able to effectively close the investment in short timelines. That's one of the ways we've been able to compete against larger REITs like store capital or stag industrial who are big publicly traded single term and net lease investment firms.
There are various incremental ways to build value.
If I were the guy selling my business back, I don’t want to work with a smaller outfit. I wouldn’t want to throw it in the machine of someone like that. Not that there's anything wrong with that. There are some people that’s like to be tossed in the machine but to know that you're dealing with a smaller operation would be better. All of your 506(b)s, 506(c)s, you're dealing with accredited investors only. What are some of the requirements that people that want to get involved with you are going to have to have to be involved?

Our particular deals are direct investments, meaning it's not a fund. We set up a special purpose LLC, which takes ownership of each one. Ultimately, we do about 9 to 10 projects a year on average. The way we structure mostly is 5 or 6 feat. We have built a loyal and reliable investment group. That group is who we include in these offerings and how we get funded.

This is not an advertisement. What kind of returns your investors are getting so that those who are reading this that are interested would be able to bracket? Every deal is different. What is it that your investors usually get besides not having to deal with any of the headaches of ownership?

From a cashflow basis, I'll compare this to multifamily. In multifamily, you tend to come in and you're buying an underperforming asset. You have a business plan in place. After you take ownership, you say, “We're going to paint, change cabinets, flip countertops, and all this stuff. We think we can improve rents and occupancy,” but there's execution risk there. On the other hand, we are more of a defensive play. We're coming in, we have 100% occupancy and a fully occupied building. There are pre-negotiated rent bumps in the lease. We know every year there’s a high degree of certainty that rent is going up. Ultimately, it's a defensive cashflow play first. That cashflow from a cash-on-cash basis starts from day one usually between 7% and 12%.

That's mailbox money. That's the stuff you can count on every month to pay your mortgage, your electric bill, your car payment, and all your bills. That's not speculative money. I love a value-add investor guy as much as everybody. I'm in the development space but even I look at value-add a little different. You are taking my word for it. I am thinking that I can do this. Even in the development space, the bank doesn't take my word for it. The investors don't get appraisals. You’ve got built-in cashflow. You've got signed leases. You've got credit-worthy tenants. All of those things are part of the pluses and minuses that make a great deal. I don't produce cashflow on day one. Value-add doesn’t produce cashflow on day one.

For that, your investor profile, they usually made the pile of money they want, not necessarily at the end of life's road. We don't want to use that. They are looking to get to the point where they've got cash coming in instead of all their cash going out so they can live their life without that job chaining them down or something. They're looking to fire up the motor home and go see the world. Maybe not 100 countries but they'll try to get there. There are different profiles but they're looking for that security that says “Yes, it's asset-backed. It's backed by real estate. It's cash flowing and it's backed by the balance sheet of a large company.”
RRE 267 Neil Wahlgren | Single Tenant Risk
Single Tenant Risk: As you grow, start adding more reliable passive income streams.
Single Tenant Risk: As you grow, start adding more reliable passive income streams. 
To use a tradable markets comparison, when you're young, you're probably going to have more stocks and bonds. Not to say you shouldn't have any bonds but this is back in the day when bonds produce something. Imagine that world. You would start on a riskier stock play and then slowly, as you approach that motorhome age, your portfolio would transition. This is no different. When you're 30, you might have more big value-add potential or development deals with a smaller amount of passive income. As you grow, there's a case to be made that you want to start adding on additional reliable passive income. For what it's worth, these have a profit split on the end. Full cycle with appreciation, we've been able to return on deals. We bought, held and sold high teens in terms of average annual returns.

Those are phenomenal that you’re getting cashflow from day one. As a friend of mine says, “There's a butt for every seat. There's an investment for one of those. That's the thing that we try to do here in the show. It’s to provide more information because everybody wants to be a wholesaler. Not everybody wants to be a fix and flip guy. I went all the way in on my first fix and flip, I bought a house for $5,000. I moved it a mile down the road and put it in a basement. Needless to say, I only did one. There is an investment for everybody. With that being said, Neil, where can people find you and MAG Capital?

We have a website with some general info. It's www.MagCp.com, nice and easy to remember. Personally, I love to hear feedback on the show. Any questions or if you're interested in talking more about joining the investment group, just drop me a line at Neil@MagCp.com. Drop me an email there and I’m happy to discuss more.

Neil, I appreciate you taking time out of your flying schedule and all that you're doing on MAG Capital to sit by and talk with us. I appreciate you giving that information to our readers here on the show. We super appreciate it because we know that our job here is to help investors understand what they want to do and execute on that through education. That's what we're trying to do here. Make us smarter investors so that we wind up with fewer sad stories and difficult situations that were being the shoulder to cry on. Neil, I really do appreciate you stopping by here on the show.

Thanks for having me.

Don't forget to follow us. You can find us on YouTube or hit us on Spotify or iTunes where we are on podcast list. You can follow us there. Follow us on Facebook and Twitter. We're in all the usual places. We appreciate you guys stopping by the show and we can't wait for you to come by on the next episode where we will talk more about real estate because that's what we do. We'll talk to you soon.

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About Neil Wahlgren

Neil wahlgren
Mr. Wahlgren brings nearly two decades of leadership in operations and capital markets. Prior to MAG Capital Partners, he led a Bay Area real estate investment firm, raising capital for over $200M in projects. Before that, Mr. Wahlgren logged over 2,500 flight hours piloting the C-130 in the Air Force and Navy. Following combat tours to Iraq and Afghanistan, he concluded his military career as a Lieutenant Commander. Mr. Wahlgren now resides with his wife and son in San Francisco where they enjoy flying and sailing. He holds a BS from the Air Force Academy, an MBA from Texas A&M and an MS from Troy University.